RAK
07/09/2012 14:30
ADDRESS
REL: 1430 HRS Rakon Limited
ADDRESS: RAK: Rakon Annual Meeting: Chairman's Address
Bryan Mogridge - Rakon Chairman's speech - Annual Shareholders Meeting - 7th
September 2012
Fellow shareholders it is a pleasure and privilege to address you at this the
7th AGM of Rakon.
I encourage you to ask as many questions about the business as you would like
as it is important that you understand the company that we together own. As
well as questions during the formal part of the business there will be plenty
of opportunity following the meeting to ask any of the Directors or the key
management who will be manning the displays at the back of the room further
questions, about the accounts, the growth plans or the products.
The past financial year has not produced the result any of us would like.
Although Rakon's revenue in US Dollars was a record, but when translated back
to New Zealand dollars it was down 6% on the previous year. Our EBITDA at
$13.1 million was a disappointment to all no matter whether you own Rakon
shares or work in the business. Naturally we all want to do better but
markets have been tough and the New Zealand dollar remains persistently high
against Rakon's trading currency the US Dollar. Frankly despite our team's
best efforts the global economic slowdown is making everything a bit harder
and it is taking longer to achieve our global goals than we planned.
The past year was an extremely important one for Rakon with the completion
and successful opening operations at our new factory in Chengdu (China).
Rakon is unique in the world of crystal oscillator manufactures in that it is
the only one with a global presence across 5 countries and a broad spread of
products from high value small volume to low value high volume. Our global
mix and especially our substantial presence in China was a key factor in the
recent letter of intent to quadruple our sales to the world's largest telecom
infrastructure manufacturer Huawei. Huawei and other similar companies around
the world that form our key customer base reads like a who's who of the very
best manufacturers to the communications, telecom infrastructure, aerospace
and mobile handset business.
Over the past year we have received a lot of criticism and advice about the
performance of Rakon, from shareholders, commentators and the shareholders
association. Some of it is helpful but a large percentage is not and often
reflects a serious misunderstanding about the business that we own together
and what it does, what its strategies are and the potential that it has.
Naturally I can't address everyone's points here today but I remain open to
any form of communication and will happily correspond, as I have done to date
with anyone sharing a genuine interest in Rakon. In the past we have invited
our key critics to visit the Auckland factory to better understand the
business but in almost every case they don't turn up.
I would like to deal with some of the main points that have regularly been
raised now.
There are too many Robinsons on the Board: Brent Robinson is CEO with 33
years experience, Darren is the Marketing Director with 22 years experience
and Warren is the founder with 45 years experience. In this industry clearly
experience is essential for long term success and so in that case it's hard
to fault the depth of contribution these 3 men provide the company, their
involvement at this high level is essential and supported by all board
members. One of the criticisms about their number I also hear is that Darren
as the Marketing Director should just be an executive rather than a full
board member. The Board's view is that it is critical to have the commitment
of the Marketing Director around the Board table and to be purely mercenary
about it he doesn't get paid any extra for being a director he just takes on
more risk!! Another point made is that with their combined presence there is
insufficient weighting in favour of independent directors as Sir Peter Maire
is not regarded as independent. We have had some interesting insights about
the ratio of independents pointed out to us by one of our major Institutional
shareholders and we accepted that thesis appointing another independent in
Peter Springford who has extensive global business experience and importantly
commercial experience in China. As well we have for some time been searching
for another director, one living overseas with a good depth of experience in
a global tech business who can not only assist our growth strategies by
keeping their ear to the ground but also maybe open doors at a high level for
our key global team. During our search we had a helpful suggestion from
another large institutional shareholder that led us to our chosen candidate
and I would like to announce today that we will be appointing Herb Hunt from
Silicon Valley who has a distinguished career in the technology sector having
worked with IBM for 32 years including a stint as CEO and Chairman of IBM New
Zealand during the late 1980s, followed by VP Operational roles in Asia and
Europe in the 1990s. Herb then went onto to join Seibel Systems in
California as a Senior Vice President acting as Chief Technology Officer and
Strategy lead for the CEO. Later Herb joined Symphony Technology Group as
Executive Vice President Operations also based in California. Herb will join
the Board in November and more detailed information will be provided to the
market separate to this comment today.
You haven't ever paid a dividend: We said in our prospectus that we didn't
anticipate paying a dividend for the foreseeable future and last year I
reiterated that even though two years previous I was hopeful that come
calendar 2013 we might be in a position to consider one; that expectation now
seemed very unlikely. For those who invest for dividend yield I still don't
see Rakon paying a dividend in the foreseeable future. When we launched the
company in 2006 we definitely didn't see the Global Financial crisis that is
still continuing today. This has not only brought challenges in our defined
markets it has caused us to build our global manufacturing footprint faster
and more substantially than foreseen in an effort to remain globally
competitive as New Zealand with its high valued Dollar becomes less and less
favourable as a place to manufacture. Also margins are under pressure in our
market sectors as the major competitors in Japan are happy to supply at very
low profits.
Well if you don't pay a dividend, you should be a growth stock! This is the
flip side criticism of not paying a dividend and one that we understand. The
problem here is that our share price has gone down rather than up and also
some investors believe that if you don't pay a dividend then your share price
should rise regularly to compensate for the dividend income foregone. While
there is never any risk free certainty in business there is logic to this
observation, the real problem arises from the time horizons of investors.
Some may want to see this capital increase occur every year when the reality
is that when you are building a global technology business it is more likely
to be a much longer time horizon.
You keep blaming the exchange rate for poor performance other exporters deal
with it ok - why can't you? We don't blame the exchange rate we point it out
as a major reason for profit erosion, as I'm certain it is for all New
Zealand exporters. We hedge our currencies exposures as much as we are
prudently able and get expert advice to supplement our own experience and
judgement. It is very important to remember that for every 1 cent movement in
the US: Kiwi cross rate that costs Rakon $1.5 million EBIT or approximately
$1 million after tax profit which is about one half a cent per share. At the
current exchange rate of around 80 cents US to the NZ dollar being at least
overvalued by 10 cents that's 5 cents per share lost that could either be
invested in the firm or paid as a dividend to Rakon shareholders.
Rakon is just a commodity producer: Rakon has some commodity products but a
larger percentage of our product mix is not commodity. We have never hidden
from the fact that we supply components and I said in the 2006 prospectus "It
must be cautioned that Rakon can face business risks caused by the changing
nature of technology, and the fact that Rakon supplies components (albeit
critical) to the manufacturers of GPS products and other devices and is
subject to consumer demand for those products"
You're one of New Zealand's worst share market performers: We admit our
performance hasn't been good especially when compared to where it has dropped
to now from the overbid highs of 2007. Importantly the Board focuses on the
long term and is determined that building a strong global company that is
able to survive in all economic climates is the ultimate goal and over time
that will lead to sustainable profits and a share value reflecting that. I
recognise that the current situation annoys those investors who want to
produce quarterly gains, but in the current economic climate Rakon is
unlikely to do that for you. The Board collectively owning more than 30% of
Rakon would naturally like that situation to be reversed and we are demanding
of management to achieve growth. Our focus is the long term, being successful
and achieving a value commensurate with our potential profit. We also realise
that some shareholders see a relationship between the performance of the
company and the remuneration of the Board. We, as significant shareholders
understand that and although there has been no increase in directors' fees
for the past 5 years we do not intend to seek any increase for individual
directors until Rakon at least achieves an EBITDA of $25 million, and even
then we will be very considered as to whether or not we will seek anything at
all. In a similar show of support for the company the CEO and the Marketing
Director, have agreed to have their remuneration fixed at today's levels
until such time as the $25 million EBITDA is achieved. It is important to
note that the overall increase in directors' fees being sought today is to
cater for the addition of Peter Springford and does not represent any
increase for any director of Rakon.
I mentioned earlier that our Japanese competitors are prepared to currently
sell products for breakeven or less in some cases. We have been able to
compete with this foolishness because with our Chinese and Indian facilities
we are very competitive. However there is no doubt some oversupply in the
crystal industry and also the need for some competitors to upgrade investment
in plant and equipment. This will inevitably lead to some industry
consolidation. With Rakon at the leading edge of recent investment and
quality we aim to be a key player in any industry rationalisation. Should
anything develop we will keep the markets fully informed.
When Rakon was floated on the public markets it was largely a TCXO supplier
to the growing GPS market. That market altered very quickly and to stay
relevant in the frequency control (or timing market) we made a very important
acquisition of Frequency Control Products Ltd which broadened our market
spread and allowed Rakon to grow avoiding serious contraction as the GPS
market changed dramatically. Rakon is today a global high tech manufacturer
and such market shifts will continue and place risk and opportunity in our
path. We study those shifts intently and have made investments in an effort
to find the most profitable and lasting path for Rakon. Our CEO, Brent
Robinson recently said "I have never felt better about Rakon's strategic
positioned opportunities for growth in the markets that we are in." Brent has
33 years experience in this business one of a few in the world with such
expertise. The Board also supports Brent's view and encourages him to fulfil
those opportunities. You will hear more about those now as Brent follows me
with his address.
So while our share price and profit performance is not where we want it to be
Rakon is very well placed for the future. Management and the team globally
are very energised by the investments we have made over the past 3 years and
firmly believe we can capitalise on our unique global position. As investors
it is over to you to form your own views as to the company's long term value
but today's starting point of 44 cents per share is half the company's net
tangible asset value - in other words selling for half price.
Thank You.
Ends.
End CA:00227051 For:RAK Type:ADDRESS Time:2012-09-07 14:30:07
